IRS tackles exclusive provider arrangements and UBIT.

• Author: Kautter, David J.
• Position: Exempt organizations - Unrelated business income tax

In an Aug. 14, 2001 field memorandum, the IRS discussed several scenarios in which exclusive provider arrangements might not give rise to unrelated business income tax (UBIT). An exclusive provider arrangement is an arrangement under which an exempt organization agrees that products or services that compete with the payor's products or services will not be sold or provided in connection with One or more of the organization's activities. The Service issued the memo because of an "incorrect assumption" that the corporate sponsorship regulations create an implication that exclusive provider contracts are automatically subject to UBIT because they fall outside Sec. 513(i).

The IRS noted out that, although the income from some exclusive provider arrangements may be includible in unrelated business taxable income (UBTI), not all arrangements meet the criteria for inclusion in UBTI under Secs. 511-513. For example, a university may enter into a multiyear contract with a soft drink company to be the exclusive provider of soft drinks on campus in return for an annual payment. If the university does not have to provide services or conduct activities in connection with the enterprise, it may not have the requisite...